Visa has become well-known for sponsoring the Olympic Games and showcasing their latest contactless payment (NFC) technology. We’ve been led to believe that contactless mobile payments are big – or if they’re not big yet in your region – they’re the next big thing. But in the past ten years, contactless payments alone have stagnated while retailer-owned, loyalty-driven mobile payment apps (like the Starbucks app) have flourished. What’s really happened? What are the facts?
Why hasn’t the type of NFC-based payments technology that Visa has been profiling caught on more widely with consumers and retailers?
Firstly, let’s quickly look at NFC from a technical and functional perspective. NFC is short for near field communication. The NFC standards for how devices can communicate without any physical contact were set in 2003. Think of NFC as “micro-wifi” that enables one device, for example your phone, to communicate with, for example, a payments terminal. The communication happens over the air, just like wifi, except the two devices need to be in near proximity of each other, hence the name: near field communication. That’s basically it.
The pitch from the payments providers wanting to push this technology was basically that it would be super convenient to simply “tap and pay” with your phone, rather than having to swipe or insert your card into a machine to pay. Sounds logical enough when initially presented, faster seems naturally better. As a consumer I would say “bring it on!”.
The problem with new technology like this, in contrast to existing technology, is that you need all the devices to support it. Basically you have to replace the old boxes with new boxes. For an industry as large and fragmented as payments, this means that tens of millions of payment terminals need to be replaced before you can even start to use this new way of paying with any real confidence. This was, number one, a big logistical problem. Merchants basically had to be convinced that buying or leasing a new terminal, when their old one was seemingly working just fine, would be the smartest thing to do. Promises were made that this new and quicker way for people to pay would drive revenue.
Another major problem for the massive adoption of NFC and its ability to drive revenue for retailers, besides the terminal dilemma, was that many markets have their own card systems. Consumers tend not to think about it, but in Europe, most countries have domestic debit card payment schemes that are cheaper and more widely used than Visa and MasterCard. Without them joining the NFC standard, the new system would shift payments from the cheap domestic rails, to more expensive Visa and MasterCard payments. This is why the Nordics were super slow to adopt NFC as both Norway and Denmark already had proprietary debit schemes with minuscule transaction costs compared to said international card schemes. Germany has the same and the list goes on. This eventually became such a problem for the networks that both Visa and MasterCard had to put massive price cut incentives on NFC payments to move the needle on the merchant side.
Another less known fact which we have studied is that the notion of faster payments with NFC does not actually apply in most situations.
Most people’s payments are domestic and in local stores. In general around 90% of retail still happens in physical stores. So, if we look at the payment use-case, you are still you, you are in the same queue with the same people as before, you buy the same stuff and you pay using the same terminal. You then wait for your goods, or put them in a bag, and leave after paying. The payment aspect of this flow actually represents a very small part of the overall time spent, regardless of swipe, chip or NFC.
Consider grocery shopping. The total amount of time spent from when you add your goods to the belt, and bagging your goods, to when you leave the store after paying is identical regardless of NFC. So, in fact, the promise of convenience driven by speed does not apply. Customers know this, simply by trying.
Most of us have a well developed muscle memory for our payments. Meaning we pay like we have always paid – swipe, chip or card payment in general always works. The practical distribution of NFC has been troublesome and the lack of acceptance has made it hard for us to change habits to frequently use NFC payments. If it fails once, you fall back to how you used to pay, and stay there. This has been proven by the adoption numbers published for various NFC based mobile payment schemes (which are not really mobile payments – at the end of the day, they’re just card payments but facilitated with a mobile) including Apple Pay where the trial rate is high, but the sustained use is low. Many try it and realise it does not fundamentally change anything in a shopping scenario.
The growing number of reported NFC payments is in fact not driven by mobile, it’s simply from the good old fashioned payment card being equipped with an NFC chip. So you pay with the same old card, but you can now choose to hold the card against the terminal rather than swiping or inserting. Does this bring about the change that was promised? No. Again, it’s the same user, same queue, same merchant, same terminal and same card, you have simply changed the mechanics of how you present your card, and merchants know that it did not bring any further customers to their stores.
It’s clear that the promise of joy, convenience and speed with NFC was never fully-delivered. There are a few use cases where it truly is awesome, however. I’m a big fan of NFC as a technology, if used in the right context. One such example is public transport. Walking through a gate without having to buy a ticket is a great use case. Queuing in a store and finally paying with swipe, chip or tap makes no difference.
So the big question is… what is the right way? How can mobile payments really deliver joy, speed, convenience and actually increase sales as promised to the merchants?
I could tell you what I think. But rather than listening to my opinions, let’s look at the data.
Starbucks, as reported in this piece from Recode, has higher adoption and use than any other mobile payment service for merchants in the US. They have more users than Apple Pay, more users than Google Pay and more users than Samsung Pay… Why?
There are many reasons why Starbucks is the number one. It’s easy to argue that they have a loyal fan base, that they are already a huge player with massive distribution and that they have marketed their solution with heavy incentives etc. All of those arguments are probably true. But that’s also true for Apple, Google, Samsung and all the banks and payments players backing the general NFC-based solutions from said companies. In fact, the sum of consumers and merchants reachable by the NFC-players mentioned far outperform that of Starbucks. So there has to be another explanation than simply blaming Starbucks for being better at marketing than Apple, Google, Samsung, Visa, MasterCard and the banks combined.
We have learned that NFC does not really solve any problems. It’s simply an alternative mechanism to do the same old payment you have done for years with the same card. And for the mobile version of NFC, it’s like gluing your card to your phone. The rest is the same. So, you are not solving any problems. In fact you are introducing new problems. Consumers need to adopt a new habit, without any material benefit. On the merchant side, it’s also problematic. You have to buy new hardware without it actually enabling you to reach or serve more customers. The queue is the same as before, and the overall cost is the same, if not higher (especially relevant for merchants in countries with cheap debit systems).
Firstly, it’s an app. It works on all phones, with no special requirements to be a customer of a specific telco, a specific bank or have a specific card. It works for anyone.
Secondly, it’s more than a payment solution. Much like Uber, the Starbucks app has removed the pain of paying, by making that the least important feature. It’s an order app. What does that translate into for consumers? You can browse the menu, pick your favourite or compose a new cup of coffee from anywhere. When you want to order, you don’t need to queue up, you just order and pay, knowing the product will be made while you walk to the shop. This saves you a lot of time! In fact, it removes the whole in-store shopping cycle completely. It delivers on the promise of speed, convenience and thus brings joy, since you can focus on enjoying the products, rather than waiting in line. The payment is already taken care of, remotely, without requiring any hardware. It’s an Uber moment for coffee.
On the merchant end, all the same benefits apply. You don’t have to fill your store with customers who impatiently queue, who are indecisive about what they want to order, who have to fumble to bring out cash or cards and who again, queue up to get their product. You can focus on making the already paid for orders, in high volume, on less square feet. This in turn enables you to give even better incentives, because margins are higher with increased volume. You know more about your customers in an app environment, than you do with a cash or card payment. So you can even give people personal discounts and loyalty incentives tailored to their habits. There is nothing that brings people back to you like getting them to pre-pay for a set of products. For example, 25% off if you buy 10 of your favorite coffees and then pick them up one by one when you like.
That’s why Starbucks is crushing the other “mobile payment” options. I use quotation marks because as mentioned above, we do not define NFC payments as true mobile payments given you’re bound to a physical location and piece of hardware – it’s by definition, not mobile.
Our platform offers the power of the Starbucks solution to anyone who wants to build their own Starbucks experience and then some. And you can imagine the power of the Starbucks solution applied on a general base as a tool for all your merchants to use..
What retail banks and the payment schemes need to understand is that in the lack of such solutions being made generally available by the big schemes or banks, the merchants or someone else will develop it.
There are many others. In China, AliPay has realised this potential and gone to market with a general solution enabling people and merchants to pay and get paid in an app environment that brings the Starbucks experience to anyone that wants it. Using the same model, Nordic banks have made domestic mobile payment services that have quickly reached up to 75% market adoption across the whole population. Dwarfing traditional payments, these mobile payment solutions have become super popular. Consumers and merchants have fallen in love with the “Starbucks experience”.
We now use our phones for most of our day to day payments and shopping. This trend is massive, undeniable and should scare the banks, the payment schemes and the overall payment industry. The new solutions predominantly circumvent the old rails, replacing them with new. This is where Visa, MasterCard and the traditional giants are being left behind. This trend is being fuelled not only by consumer affection, merchant adoption and overall better user experience. It’s also powered on the backend by new European regulation. PSD2 is forcing banks to open up access to bank accounts, enabling the new solutions to charge bank accounts directly. Effectively this gives all apps – similar to AliPay, Starbucks and others – direct access to people’s money without having to pay the tolls from traditional card rails.
The bad news for the legacy players is that this new generation of payment solutions are working and growing really fast. The good news for those who would like to copy the success of the Nordic retail banks, AliPay and Starbucks is that such a platform already exists and is being provided on a white label basis for banks, telcos and retailers.
If you are interested, let’s have a chat.